Effect of Tax Policy on Economic Growth in East African Countries

Abstract

Taxation has been identified by the IMF and other leading financial institutions across the globe including the World Banks and its sister organizations as the only practical and viable means through which the government can raise sufficient amount of revenues for financing public expenditure. While taxation as critical element of fiscal policy has been found to have a significant influence on economic growth; excessive and inequitable taxation has been found to create disincentives for households to increase their level of productivity and participation in the economy. Despite this general assessment, this study identified a gap in existing literature and therefore sought to examine the effect of taxation policy on economic growth in Eastern African countries. Employing a descriptive research design and purposive sampling technique where four East African Countries, namely, Kenya, Rwanda, Tanzania and Uganda were sampled. The study utilized secondary data which was obtained through desktop research from the World Bank Website and key government institutions from respective countries. The study conducted both descriptive and inferential analysis. Findings from the study established a positive and significant relationship between direct taxes, foreign direct investment and public debt with economic growth. However, results for indirect taxes revealed the existence of a significant but negative relationship between the predictor and outcome variable. Based on the results, the study makes a recommendation for policymakers in East African countries to pay critical attention on tax policy structure and how it is administered especially regarding indirect taxes.